WPS4371
Policy ReseaRch WoRking PaPeR 4371
Europe and Central Asia's Great
Post-Communist Social Health Insurance
Experiment:
Impacts on Health Sector and Labor Market Outcomes
Adam Wagstaff
Rodrigo Moreno-Serra
The World Bank
Development Research Group
Human Development and Public Services Team
October 2007
Policy ReseaRch WoRking PaPeR 4371
Abstract
The post-communist transition to social health insurance that, controlling for any concurrent provider payment
in many of the Central and Eastern European and reforms, adoption of social health insurance increased
Central Asian countries provides a unique opportunity to national health spending and hospital activity rates, but
try to answer some of the unresolved issues in the debate did not lead to better health outcomes. The authors also
over the relative merits of social health insurance and tax- find that adoption of social health insurance reduced
financed health systems. This paper employs a regression- employment in the economy as a whole and increased
based generalization of the difference-in-differences unemployment, although it did not apparently increase
method and instrumental variables on panel data from the size of the informal economy.
28 countries for the period 1990-2004. The authors find
This paper--a product of the Human Development and Public Services Team, Development Economics Research
Group--is part of a larger effort in the department to shed new light on health financing and delivery issues. Policy
Research Working Papers are also posted on the Web at http://econ.worldbank.org. The corresponding author may be
contacted at awagstaff@worldbank.org.
The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development
issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the
names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those
of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and
its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
Produced by the Research Support Team
Europe and Central Asia's Great Post-Communist
Social Health Insurance Experiment:
Impacts on Health Sector and Labor Market Outcomes
by
Adam Wagstaffa and Rodrigo Moreno-Serrab
aDevelopment Research Group, The World Bank, Washington DC, USA
bDepartment of Economics & Related Studies, University of York, York, YO10 5DD, United Kingdom
Contact author: Adam Wagstaff, World Bank, 1818 H Street NW, Washington, D.C. 20433, USA. Tel.
(202) 473-0566. Fax (202)-522 1153. Email: awagstaff@worldbank.org.
Keywords: Social health insurance; impact evaluation; health sector reform; Europe; Central Asia.
Acknowledgements: Our thanks to the World Bank's Research Support Budget for financial support, to
Armin Fidler, Ana Djordjevic, Peyvand Khaleghian, Jack Langenbrunner, Silvia Mauri and Pia Schneider for
information on social health transitions in Europe and Central Asia, and to the participants of seminars at
the World Bank, the University of York, and the Nordic Health Economists Study Group for helpful
suggestions. The findings, interpretations and conclusions expressed in this paper are entirely those of
the authors, and do not necessarily represent the views of the World Bank, its Executive Directors, or the
countries they represent.
1
1. Introduction
Ninety percent of the OECD countries finance the majority of their health expenditures
publicly (the exceptions are Mexico and the United States). The OECD is split roughly equally
into tax-financed systems and social health insurance (SHI) systems: in half of the 30 countries,
SHI contributions make up a majority of general government spending on health. In the rest of
the world, the fraction of countries financing the majority of their health spending publicly is
smaller (56% compared to 70% in the OECD), and only 21% finance the majority of their
government spending through SHI.1
The relative merits of SHI and tax finance is an old debate, but one where the evidence is
surprisingly thin. There is fairly clear evidence that payments for health care are more
progressive or less regressive in tax-financed systems than in SHI systems.2 It is also clear that
tax-financed systems are more successful at ensuring universal coverage within a single health
system; SHI systems, by contrast, typically struggle to cover the informal sector and the poor.3
But the presumption that those not covered by a SHI scheme fare less well--in terms of the
quantity and quality of care they receive, the amount they pay for it out-of-pocket if they get it,
or both--is not always borne out by the limited evidence available.4
1 The figures in this paragraph are calculated from data in the World Health Report annexes.
2 Wagstaff et al. (1992; 1999) find that SHI is less progressive than tax-financed systems (in fact, is mostly
regressive) in the OECD countries. O'Donnell et al. (2007) find the same in Asia.
3 Carrin and James (2004) document the time it took several of the SHI countries to achieve universal coverage.
Baeza and Packard (2006) document coverage in several Latin American countries. Wagstaff (2007) includes
coverage statistics for several countries, as well as for different groups.
4 Being in a SHI scheme is typically found to be associated with higher rates of utilization, but not always lower
levels of out-of-pocket spending or a lower risk of especially large out-of-pocket payments--see e.g. Gertler and
Solon (2000), Waters, Anderson and Mays (2004), and Wagstaff and Lindelow (2005).
2
Important as these issues relating to payments, coverage and utilization among
subpopulations are, they are not the focus of this paper. Rather the focus is on the relative merits
of SHI and tax-financed systems at the population level. Here too the evidence is thin. There is
little systematic evidence on whether SHI systems tend to spend more on health care, and if so
whether this translates into superior health outcomes. There are those who argue that SHI
enables higher levels of health spending. The population may, it is argued, be more willing to
pay SHI contributions than (other) taxes because the revenues are earmarked for health services
and contributions confer entitlements to use them. There are those too who argue that SHI
systems are more efficient at transforming money into health, because they more easily permit a
separation between the purchasing of health care (done by a SHI agency kept on its toes by the
contributors) and the provision of health care (which could be done by either government or
private providers).
The evidence on these points is virtually nonexistent and there are counterarguments.
Contributions are linked to earnings through a formula and typically subject to ceilings that may
change infrequently, with the result that at times of rapid growth SHI revenues may not keep
pace with per capita incomes and a tax-financed system might produce higher revenue growth.5
Some governments have reduced their tax-financed health spending as SHI contributions have
increased, raising the suspicion that total government spending on health may not increase
following SHI adoption.6 Evasion in SHI schemes has proved a major problem7, so if the
treasury bases its tax-financed spending on theoretical contributions, total government spending
on health may actually fall following SHI adoption. Some SHI agencies have become corrupt
and unresponsive to their contributors, selecting providers through cronyism rather than through
5 See, for example, Lu and Hsiao (2003) on Taiwan's experience in this regard.
6 See, for example, Twigg (1999) on Russia's experience.
7 See, for example, Escobar and Panopolou (2003) on Colombia, and Twigg (1999) on Russia.
3
transparent and competitive contracts. 8 SHI agencies may be more prone to "capture" by
provider interest groups who may secure better terms (including higher wages) for providers.
One suspects that SHI systems are also likely to be administratively expensive, often requiring
revenue-collection efforts separate from those of the tax authorities, a contracting apparatus, and
where multiple SHI schemes exist alongside one another a loss of monopsony power. It is not
implausible that SHI systems spend less and are less successful at translating money into better
health. But even on these counterarguments, the evidence is at best anecdotal.
It is not just with respect to the health sector that there is a lack of evidence on the merits
and demerits of SHI and tax-financed health systems. The same is true of their consequences for
labor markets. Some of the "old" SHI countries--notably France, Germany and the
Netherlands--have recently been reducing or are trying to reduce their reliance on payroll
financing9, in part out of a belief that it has contributed to unemployment and informalization of
the labor market. These issues have also been debated in Latin America.10 Yet there is really
very little direct evidence on this issue, most taking the form of indirect evidence from studies of
the employment effects of payroll taxes.11 This indirect evidence, however, refers to all payroll
taxes which is problematic as the impacts on labor supply may be different between, say,
8 A World Bank report in the late 1990s on health insurance in Argentina (World Bank 1997), commenting on the
purchasing capacity of health insurers, argued that "it is acknowledged by Argentines that personal connections and
corrupt practices, instead of quality and economy, weigh heavily in the award of capitated contracts and other
payments to medical providers and suppliers, and this adds substantially to the inefficiency and high cost of health
care in Argentina" (p.7).
9 France widened the tax base from earnings to include nonwage income. Germany is contemplating reducing the
emphasis on the payroll, while the Netherlands in 2005 introduced a reform where insurers receive only half their
income from payroll revenues (albeit channeled through a central fund), the rest coming from flat-rate direct
contributions from members (with offsetting income supplements for low income groups) (Gottret and Schieber
2006; International Network on Health Policy & Reform 2006).
10 See Baeza and Packard (2006) on this.
11 Kugler and Kugler (2003) have estimated the impact of payroll tax increases in Colombia that were implemented
in parallel with the health financing reforms. According to their estimates, the health financing reforms, which raised
the payroll tax rate by 5 percentage points, would have reduced wages by between 0.7% and 1.1%, and employment
by between 2% and 2.5%. By contrast, Bauer and Riphahn (2002) find that Germany's payroll tax has had very
limited employment effects.
4
pensions and health services, especially in poorer countries, since people may think it more
likely they will benefit from the health services they get to use from SHI contributions than the
pensions they may never enjoy resulting from pension contributions because they fear they will
not live long enough. Moreover, studies of the labor market consequences of payroll tax changes
do not answer the question of what happens to employment and informality when smaller (or
larger) payroll taxes are replaced by larger (or smaller) other taxes.
Getting at relative merits and demerits of SHI and tax-financed health systems through a
cross-country econometric analysis where some systems are financed through SHI contributions
and others are financed through general revenues is clearly problematic because there are likely
to be unobservable variables that are correlated with both the type of financing system in place
and the outcomes of interest (i.e. SHI is potentially endogenous). A potentially more promising
strategy would be to look for changes in the way countries finance their health care, exploiting
the variations in changes across countries to eliminate (time-invariant) unobservable variables.
The difficulty with this approach is that in the group of countries that have the best data (the
OECD), there have been very few switches between the SHI and tax-financed camps (six "old"
OECD countries abandoned SHI in the 1970s and 1980s, notably Denmark, Greece, Iceland,
Italy, Portugal and Spain) and the transitions occurred some time ago, so the data available are
very limited.
This paper looks instead to a (mostly) different group of countries where transitions have
occurred with greater frequency and more recently, namely the countries of (central and eastern)
Europe and Central Asia (ECA). Of the 28 countries that are part of the World Bank's ECA
region, 14 abandoned tax-finance and adopted SHI at some stage between 1990 and 2004 (and 4
other countries had adopted SHI prior to 1990). These countries provide not only an interesting
5
"experiment" from the point of view of health financing, but also are data-rich countries, having
inherited and largely maintained the communist tradition of extensive data-gathering, and falling
under the most data-rich regional office of the World Health Organization.12 The ECA health
financing experiment thus affords a valuable "laboratory" to try to answer some of the
unanswered questions listed above.
To get at these issues, we use a regression-based generalization of the differences-in-
differences (DD) method on panel data from the 28 ECA countries for the period 1990-2004. We
explore different approaches to allowing for the possible endogeneity of SHI. The first is a
simple individual-specific effects model estimated along the lines of the DD approach. This
allows for the endogeneity of SHI insofar as the unobservables that are correlated with SHI
adoption and with our outcomes are time-invariant. We explore two more specifications. One
allows for a time-varying unobservable that can be correlated with SHI adoption and outcomes,
and whose growth rate is allowed to vary from one country to the next. The other approach is
Instrumental Variables (IV), implemented in the case of those outcomes for which the DD
generalizations do not seem to control adequately for the possible endogeneity of SHI adoption.
The organization of the paper is as follows. Section 2 provides a brief history of the SHI
reforms in the post-communist ECA region. Section 3 outlines our methods. Section 4 describes
our data. The empirical results for the health and labor analyses are presented in sections 5 and 6,
respectively. Section 7 discusses the results and presents our conclusions.
12The European office of the World Health Organization developed and has maintained a huge database to track
progress towards its Health for All initiative. In addition, it is home to the European Observatory on Health Systems
and Policies, which has produced detailed overviews of the health systems of the member countries (known as
Health Systems in Transition (HiT) profiles), as well as a variety of volumes that discuss health systems and health
policies in the region.
6
2. The SHI reforms of Europe and Central Asia: a brief history
Under communism, health care in the ECA countries was financed out of general
revenues (and out-of-pocket payments) and delivered through a centrally-planned "Semashko"
model consisting of a tiered system of health providers, each allocated budgets according to
population-based norms, with health workers paid by salary.13 In the early 1990s, as most
countries shifted away from communism, several looked to SHI to solve several emerging
problems.
The most pressing one was the dramatic decline in government revenues as a share of
GDP, caused by a variety of factors, including the growth of the private and informal sectors
where tax compliance was lower, a shrinking of traditional tax bases such as state-owned
enterprises, and pressures for tax cuts from a population experiencing declines in real income.
With falling GDP and revenues falling as a share of GDP, health sectors experienced substantial
cuts in government spending. SHI was seen, rightly or wrongly, as a way of protecting spending
levels in the health sector, the presumption apparently being that earmarking would help ensure
the health sector did not have to compete with other sectors in government spending allocation
decisions, and that earnings in the economy as a whole would fall less than government revenues
and be more stable. Providers were especially enthusiastic about SHI which they saw as a way to
increase their salaries.
SHI was also perceived as having other advantages vis-à-vis both the financing and
delivery of health care. One was the perceived potential to reduce the grip of finance and health
ministries over the finance and delivery sides of the system, the vision being that payroll tax
13This section draws heavily on Langebrunner et al. (in press).
7
contributions could flow automatically to a SHI agency that would sit at arms' length from both
the finance and health ministry, and the agency could develop a purchasing capacity and make
government providers more accountable for their performance, through provider payment
reform, selective contracting, and competition between public and private sector providers for
SHI contracts. Autonomization of providers was seen as a logical part of this process, which was
seen as necessary for better performance and greater accountability.
Of the 28 ECA countries, 14 introduced payroll taxes earmarked for health care at some
stage between 1990 and 2004, and four others had already done so prior to 1990. Early SHI
adopters in the 1990s included Estonia, Hungary, Lithuania, Macedonia, and Slovenia; all
adopted SHI in the period 1990-92. Some countries adopted much later: Bulgaria, for example,
adopted SHI as late as 1999. Often, both the employee and employer are liable, though of course
there may be wide difference between who is legally liable for what and who ends up bearing the
incidence of the payroll tax, the latter depending on conditions in the labor and product markets.
Contributions are mandatory, and in exchange for them the contributing employee is entitled to
receive health services under the terms of the SHI scheme. Groups other than formal sector
workers usually have some coverage. Contributions are required from the self-employed in all
SHI countries, and from pensioners in some. Other groups are financed out of general revenues,
but often the contributions are not specified and insufficient funds are provided in respect of
these groups, who sometimes have inferior de facto coverage.
SHI does not always raise more than 50% of revenues, though in some countries its
importance has increased over time and has gradually grown to 50% or more. This is clear from
Figure 1, which also shows the timing of the introduction of earmarked payroll taxes in different
countries. In central and eastern Europe, SHI shares of total spending have tended to be higher,
8
and payroll tax rates have tended to be higher there as a result. In the first group of countries,
payroll tax rates are normally between 10% and 15% of earnings, while in the countries of the
former Soviet Union, they are less than 10%, often considerably so (Langenbrunner, Sheiman
and Kehler in press). It is worth noting that some countries (e.g. Latvia, Lithuania and Poland)
introduced earmarked taxes for health care, but the tax base is income not earnings, so from a
financing perspective these are not "pure" SHI systems.
Some but not all of the SHI adopters--and, interestingly, some countries that have
earmarked taxes other than payroll taxes--have changed not only the sources of finance but the
way monies flow to providers.14 SHI countries now typically have a SHI agency, but so too do
Poland and Latvia that rely on income taxes or general revenues rather than payroll taxes. These
are typically independent of the ministry of health and have responsibility for administering the
SHI scheme or at least some functions, such as collecting contributions, setting or recommending
contribution rates and ceilings, pooling contributions, etc. Where it exists, the SHI agency pays
providers, but some funds still flow from the health ministry (allocations for capital spending, for
example, but also sometimes other items of spending too). Where there is a SHI agency, it
typically has explicit contracts with providers, though this has not always been the case, and has
been common only in recent years. The contracting, however, is not always selective, although
this too has become more common recently. Often there is no contracting with the private sector,
and where it does occur, it is typically in primary care.
Most SHI countries have also shifted from budgets as a way of paying hospitals (the
biggest spenders in a health sector) to either fee-for-service (FFS) or a patient-based payment
method (PBP), such as diagnosis-related groups (DRGs). Figure 2 shows the timing of the
14This paragraph relies heavily on information provided in the HiT series.
9
various hospital payment reforms, where we have used the HiTs series to classify a country's
predominant hospital payment method in a given year as falling into one of three categories: (i)
fixed budgets/block grants (the prevailing method under the communist Semashko system), (ii)
fee-for-service/payment by bed days, or (iii) patient-based systems (mainly DRG-based) (cf.
Ellis and Miller 2008). Of the 18 countries that adopted SHI, 12 switched from the use of
budgets, though in three cases the switch occurred with a lag. Some switched to FFS and stuck
with it, while others switched subsequently to a PBP. A few switched immediately to PBP.
Interestingly, some countries without payroll-based contributions also switched from budgets.
The lag in provider payment reform, the fact that different countries opted for different payment
methods and sometimes switched a second time after SHI adoption, and the fact that some non-
SHI countries also switched from budgets during our period all help to create an opportunity to
see how far any impact of SHI adoption is due to the shift to payroll finance and the setting up of
a SHI agency, rather than to provider payment reforms which could have occurred (and in some
cases did occur) even without the adoption of SHI.
3. Methods
Let yit be the outcome of interest in country i at time t, Xit be a vector of covariates
thought to potentially influence both the outcome and the SHI adoption decision, and SHIit be a
dummy variable taking on a value of 1 if country i has a SHI health financing system at time t.
An obvious model to estimate is:
(1) yit =t + Xit + SHIit +i + uit ,
10
where t is a time-specific intercept, the coefficient gives the impact of SHI on the outcome yit,
i is a country-specific effect which captures time-invariant unobservables potentially correlated
with SHI status, and uit is an idiosyncratic error term (iid over i and t). In the special case where
the Xit are omitted, eqn (1) collapses to the traditional difference-in-differences (DD) estimator.
Eqn (1) can be estimated as a fixed effects model, or in first differences. In the latter case, the
estimating equation can be expressed as
(2) yit =t +Xit +SHIit +uit,
which can be consistently estimated by pooled OLS.
Care needs to be taken to get accurate standard errors in this type of analysis. Bertrand et
al. (2004) have shown that many outcome variables used in published policy impact analyses
generate positive serial correlation in the uit. If ignored, and the model is estimated as a fixed-
effects specification, this positive serial correlation results in standard errors that are too small,
and t-statistics that are too large--possibly dramatically so. In such a case, first differences may
be preferred. Of course, if the uit in eqn (1) are serially uncorrelated, the error term in the first-
differenced version may well be subject to negative serial correlation, in which case the standard
errors would be overestimated. An obvious strategy is to report standard errors that are robust to
any type of serial correlation (and heteroskedasticity), whether one uses fixed effects or first
differences. This is what we do below in all our models. The Monte Carlo results reported by
Bertrand et al. (2004) suggest that with a sample of 28 countries the rate of rejection of the null
hypothesis of no impact ought to be close to the right one.15
15We also experimented with (block) bootstrapped standard errors, and obtained broadly similar results.
11
Our basic framework of individual-specific effects represented by eqn (1) captures the
possible endogeneity of SHIit to the extent that the unobservables that are correlated with both
SHIit and yit are time-invariant. However, endogeneity of SHI adoption will still be a problem in
our basic framework if there are time-varying unobservables correlated with both SHIit and yit. In
this sense, an additional source of country heterogeneity can be introduced in a more general
specification, through a random trend model (cf. e.g. Wooldridge 2002):
(3) yit =t + Xit + SHIit +i + git + uit ,
where gi is the country-specific trend of yit, and i and gi are allowed to be arbitrarily correlated
with the regressors. Eqn (3) thus allows for both time-invariant and time-varying unobservables
that may be correlated with yit and SHIit, albeit in a way that assumes the unobservable grows
over time in a linear fashion. One way of estimating this model is differencing eqn (3) to get
(4) yit =t +Xit +SHIit + gi +uit,
and using a fixed effects estimator on this differenced equation.16 We can test eqn (3) against eqn
(1) by testing the joint significance of the gi. Friedberg (1998) uses such a model in her analysis
of divorce laws, and finds that allowing for state-specific trends is crucial to unearthing the
impacts of these laws.
An alternative way to relaxing the assumption that SHI is endogenous only insofar as it is
correlated with the i and gi is to find instruments for the SHI adoption decision. Suppose we
have a set of instruments Zit and our basic model in levels:
16Alternatively we could use the first differences estimator once again, this time applied to eqn (4) so as to eliminate
gi, and estimate the resulting model by pooled OLS. However, this procedure would mean losing an additional
period of time for estimation purposes, which is why we have opted for the fixed effects estimator in the case of the
random trend model.
12
(5) yit =t + Xit +SHIit + eit
Under the assumption that the instruments are weakly exogenous or predetermined, i.e.
E[Ziseit ]= 0 , s